Understanding supplier credit: pre-financing and mobilisation

Export operations require considerable financial resources. Exporters often have to incur significant expenses long before they receive payment from their foreign customers. This is why the banking system has developed several financing mechanisms tailored to these specific needs.

Pre-financing loans: financing the manufacturing period

Pre-financing credits cover the needs of suppliers during the contract performance period. This financing is used when the exporter's expenditure exceeds the amount of the advance payments received.

Specialised pre-financing

These credits are granted for a specific export operation. They are generally short-term and may be backed by a guarantee from COFACE (Compagnie française d'assurance pour le commerce extérieur).

According to the article in JurisClasseur Droit bancaire et financier (2009), "Specialised pre-financing loans are granted on a short-term basis. However, COFACE issues them on behalf of the State, an insurance policy enabling the banker who has granted a pre-financing loan in euros linked to an identifiable export to reduce the risk of non-repayment by the exporter.

Banks offer these loans:

• In euros at a variable rate (generally indexed to the bank's base rate)
• In foreign currencies at variable rates, useful for exporters who incur expenses in these currencies

Please note: a subcontractor can benefit indirectly from this pre-financing by delegating the main financing, or directly when the subcontracting operation exceeds a certain amount.

Revolving pre-financing

This type of credit finances the manufacture of goods as part of a regular flow of business. It works in the same way as an automatically renewable authorised overdraft: if the exporter repays all or part of the credit, he can use it again up to the set limit.

Specialised short-term loans

Distinct from pre-financing loans, this financing covers specific export-related needs.

Exploration credits

These credits enable exporters to finance their international business development activities, including travel, setting up local offices, recruiting export staff and advertising.

They are generally granted to companies covered by a COFACE prospecting insurance policy. Banks often require "bank sponsorship" and can provide a repayment guarantee by pledging or assigning the right to indemnity.

Financing stocks abroad

These credits provide exporters with the cash flow they need to bear the costs of holding stocks in a foreign country. The granting of credit may be conditional on obtaining an insurance policy on the goods stored.

Historically, COFISE (Compagnie de financement des stocks à l'étranger) had been set up to cover these needs, but it ceased operations in 1992.

Mobilisation of credit insurance indemnities

When an exporter covered by a credit insurance policy suffers a loss, compensation is due but the insurer has a period in which to pay it. These credits enable the exporter to cope with the wait for the indemnity to be paid.

Be careful not to confuse this time limit with the time limit for making a claim under certain credit insurance policies.

Mobilisation of foreign receivables

Once the export has been completed, the exporter has receivables from its foreign customers that it can use to obtain financing from the banking system.

Supplier credit in the strict sense

In French practice, a distinction is made between short-term loans to secure foreign receivables and medium- and long-term supplier loans in the strict sense of the term. However, the legal nature of these transactions is similar: the discounting of commercial paper representing receivables from foreign importers.

Fixed price

Forfaiting is a non-recourse supplier credit. As indicated in fascicule 1050 of the JurisClasseur, this technique enables "The bank [to acquire] the foreign claim and all the risks of the transaction.

Forfaiting is generally used for large transactions (between USD 1 and 10 million) lasting between six months and seven years. It can complement a buyer credit or supplier receiving public support, or finance an entire export.

Legal and technical aspects of mobilisation

Discount

A receivable from a foreign party is generally secured by discounting bills of exchange. The receivable is evidenced by a promissory note issued by the buyer to the exporter, or by a bill of exchange drawn by the supplier and accepted by the importer.

To guarantee the discounting banker against the risk of non-payment, the buyer's banker is often required to give an undertaking, either by a guarantee affixed to the bills or by a separate letter of guarantee.

Pro forma statements

When foreign importers refuse to subscribe to promissory notes or accept bills of exchange, practice has developed the use of "pro forma" drafts. These bills of exchange are not intended to be presented for acceptance by the drawee.

The Court of Cassation has recognised the validity of this practice. Like any bearer of a bill of exchange, the bearer banker has an exclusive right to the provision (article L. 511-7, paragraph 3, of the French Commercial Code).

Bordereau Dailly

In the absence of commercial paper, the mobilisation may use the Dailly slip (Act of 2 January 1981, now Article L. 313-27 of the Monetary and Financial Code). The advantage of this is that it gives the banker a right to the receivable that can be enforced against the importer on the date shown on the slip.

Points of attention and practical suggestions

1. The choice of credit depends on the phase of the export operation: pre-financing for manufacturing, or mobilisation for existing receivables.
2. Securing transactions is essential: guarantees (COFACE, bank guarantees) protect against the risks inherent in international trade.
3. The expertise of a legal advisor can help to optimise these complex financial packages, particularly with regard to aspects relating to the applicable law, guarantees and mobilisation procedures.
4. The evolution of international regulations and the requirements of the OECD Arrangement have an impact on this financing and require constant monitoring.

The legal complexity of these operations and their tax implications justify support from a specialist. Don't hesitate to contact us to assess your export financing needs and secure your international operations.

Sources

• JurisClasseur Droit bancaire et financier, Fasc. 1050: Export credits. Credits for buyers and suppliers, Gautier Bourdeaux, published on 2 September 2009.
• French Commercial Code, articles L. 511-7 and L. 511-15.
• Monetary and Financial Code, articles L. 313-27 and L. 313-28.
• Law no. 81-1 of 2 January 1981 facilitating business credit.
• Case law: Cass. com. 28 June 1983 (RTD com. 1984, p. 115) and Cass. com. 15 Dec. 1986 (RTD com. 1987, p. 223).